The downside of wind's success

Updated 10:54 pm, Sunday, September 9, 2012

The success of wind farms in Texas is inhibiting the construction of other types of electricity generation plants, says CPS Energy CEO Doyle Beneby.

The success of wind farms in Texas is inhibiting the construction of other types of electricity generation plants, says CPS Energy CEO Doyle Beneby.

Photo: City Public Service

The downside of wind's success

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Wind energy in Texas has been a phenomenal success as measured by many different metrics. Texas has more wind capacity than any other state in the country, more than three times as much as the second-ranked wind state, Iowa.

In fact, if Texas were a separate country, we would be number six in the world. With more than 10,000 megawatts deployed, there have been days when wind energy delivered nearly a quarter of the state's power.

The positive environmental impact of this renewable energy resource that has reached scale is equally impressive. Wind energy, by displacing even a clean energy resource like a combined-cycle natural gas plant, has resulted in 5,500 fewer tons of nitrogen oxide, 17 million fewer tons of carbon dioxide, and 9.5 billion gallons of water saved in 2011 alone. This is the equivalent of taking 3 million cars off the road in Texas.

A number of challenges with wind are often discussed in the literature, primarily focused on wind's intermittency and the resulting implications for reliability. However, one challenge that is becoming apparent within the region served by the Electric Reliability Council of Texas is the impact of wind on the economics of building new generation capacity.

With a shrinking reserve margin — the cushion between power plant capacity and peak load demand — one would expect a lot of new generation to be in the works. The exact opposite is true. While many factors play into this situation, including regulatory uncertainty and the future of fuel prices, the sizeable wind resources in Texas are a contributing factor not often discussed.

This comes about since once a wind farm is up and running, there is virtually no cost to run it, i.e., the wind is free. ERCOT being a competitive market for wholesale power, generators bid in their capacity based on a variable cost, which includes the price of fuel and the efficiency of the plant. The order goes from lowest cost plants to highest cost plants, and the market clearing price is determined when supply meets demand.

Since wind is bid in at the bottom of the stack, it pushes the higher cost resources — typically natural gas plants — above the supply demand line. This is especially true during the fall and spring seasons when wind is plentiful and demand is not as high as the summer months. The result is that natural gas plants run fewer hours and get lower prices for their output than if the wind resources were not there.

From an investment perspective, running fewer hours or selling at lower wholesale prices leads to a business case that falls short on returns for building a new power plant in Texas. It is somewhat ironic that with all of the success of wind in Texas it has created a market environment that crowds out new power plants even as ERCOT is getting shorter and shorter on power.